I’m a bond guy. I’m not afraid to admit it. The action in Treasuries, or emerging-market debt or even municipal bonds may sound boring to some people. But I find that fixed-income markets often provide early and accurate information about the economy, not to mention the next major moves in stocks.
Market Roundup
So with that in mind, what gives with Treasuries here? The Dow Industrials jumped almost 500 points at the end of last week. The Powershares QQQ Trust (QQQ) jumped to within a couple bucks of its summer high.
But 30-year Treasury Bond yields have barely budged, and are still holding firm in the 2.85%-2.9% area. Moreover, the 5s-to-30s Treasury yield spread actually shrank in the past few days … and the 2s-to-10s yield spread hasn’t been able to get off the mat for the past few months.
|
|
| Bond investors do not seem convinced. |
These are the exact opposite reactions you’d expect to see in bonds from an easing in policy — which is designed to boost growth and inflation after all. Stated another way: If bond investors really believed that yet another round of global QE would succeed in boosting economic prospects, they’d be selling the heck out of bonds. They’re not. That tells me they know it’s going to fail just like every single previous round did.
While I’m highlighting market oddities, I’d note that natural gas prices plunged to fresh multiyear lows in the past couple of days. Crude oil also dropped back below $45 a barrel.
That’s certainly not the kind of reaction you’d expect from another economic shot in the arm from policymakers. Nor is it a positive for the credit quality outlook, given investor worries about the ability of energy companies to service their large debt loads.
| “That’s not the reaction you’d expect from another economic shot in the arm from policymakers.” |
I suppose I could also point out that the broader Russell 2000 Index is barely moving at all, despite the surge in mega-cap stocks. Then there’s the Dow Jones Transportation Average. It remains far below its previous high, which was set all the way back in November 2014.
Bottom line? I’ll be the first to admit I was surprised by the magnitude of last week’s rally. But it’s clear bond investors aren’t buying the euphoria yet. Unless and until that changes, I remain wary of risk assets in general … and many stocks in particular.
What do you think? Are bond investors on to something? Or am I just worrying about nothing here? Do new lows in natural gas, or ongoing weakness in crude oil prices, concern you? Or is the strength in tech stocks and big cap names enough to keep you “long and strong” the market? I’d love to hear from you at the Money and Markets website when you have a chance.
|
Meanwhile, many of you already shared some thoughts online about last week’s big rally.
Reader Holygeezer said: “What the heck is going on with the markets? The Nasdaq is back over 5000. These markets are so corrupt and manipulated there are no words for it. The One Percent must be laughing their heads off as to how easy it is to juice the markets at will.”
Reader Irv S. added: “The market has been moving up in a parabolic fashion. At some point — probably sooner than later — the fast money traders will pull the plug, sell their longs, and short the market. I’m content to be mostly in cash and short duration high quality bonds. I sleep better at night.”
Reader $1,000 Gold was more optimistic, saying: “A classic inverted head and shoulders formation is about complete in the S&P. The right shoulder is forming now. Expect the usual bear trap before the correction ends. The bear trap is one last scary pullback that brings the bears out in full force, but is actually a great buying opportunity. Smart money will take advantage of that.”
But Reader Robert P. sided with the bears, offering this take: “This pattern we are in right now seems very much like about this same time of the year in 2007. It was along about then that the Fed unexpectedly injected their first batch of liquidity into the system.
“The markets went up like wild, just like the Draghi rally and the Chinese rate cut. But it turned out to be about the top of the rally, and the real blood-letting came about during the course of the next year. So based on that, 2016 may turn out to be a bear!”
Bottom line: Everyone has an opinion about the latest action, and what the technicals and fundamentals are telling us. I’ve stated mine clearly on a number of occasions in recent months: The bull market and the economic expansion are under threat from all sides. The big breakdown we saw in August looks like the start of the next bear market to me.
Plus, we’re seeing major divergences during this October rally. That’s unlike anything we saw in past rounds of QE, which pretty much drove every asset class on the planet up at the same time and in roughly the same fashion. So I remain cautious here.
Anything else you want to add? Then here is the link you can use to do so.
|
Well, it looks like the Wall Street Journal isn’t mincing words. The lead of its main story online today: “Quarterly profits and revenue at big American companies are poised to decline for the first time since the recession, as some industrial firms warn of a pullback in spending.”
It goes on to note that sales for S&P 500 companies are likely to drop 4% from a year ago, the third decline in a row. That hasn’t happened since the Great Recession in 2009.
America has become a “Renter Nation” in recent years, as the financial and psychological fallout of the housing bust drove many individuals and families to rent rather than own homes. But could the boom in apartment construction and the surge in building pricing be signaling a top?
That’s what some are wondering in the wake of Sam Zell’s decision to sell more than 23,000 apartments for $5.4 billion. The real estate billionaire’s sale represents roughly one-fourth of all the units in the portfolio of his Equity Residential (EQR) REIT.
Pakistan and Afghanistan suffered a significant earthquake today, causing dozens of deaths at least. The magnitude 7.5 quake was centered in the far northeast of Afghanistan, flattening homes and damaging other buildings.
Duke Energy (DUK) became the latest regional utility to acquire a natural gas distribution company. It will spend $4.9 billion in cash for Piedmont Natural Gas (PNY), a move that will add nat gas and propane businesses in the Carolinas, Tennessee and Georgia.
So what do you think about Zell’s transaction? Is the rental boom going to peter out? How about the latest utility sector deal? Or the downturn in industrial profits? If you have any comments about them, feel free to share them online.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 54 comments }
I believe that part of the problem with the bond markets is that the Fed continues to roll over maturing debt while the supply of treasuries deminishes. Sort of a behind the scenes QE.
Zell’s move is smart sell at the top.
I have observed when the equity curve escalates with extreme vertical thrust, a correction or crash is just around the corner… guess we’ll have to wait and see. I’m personally very fond of revenue muni bonds… they’ve done me very well as a long term fixed income vehicle.
I agree. I’m mainly an income investor anyway. I have always been around 50 per cent in in-state munis. A five per cent tax free yield and some modest capital gains has been a real winner for me. I don’t get the fabulous capital gains but I sleep well at night and still have my original principle. Compounding interest is pretty good stuff. Jim
Roll over the bonds, and buy them back with newly printed money sounds like Japan…this will end badly when people realize there is no income provided by percentages lower than inflation. The only way treasuries stay attractive is if interest rates go negative.
I am becoming highly suspicious of market manipulation by either our government or another. I must agree with “Holygeezer”. Open market volume, and price fluctuations are not reacting normally to current news impacts.
Shocking not much talk about the Federal Reserve raising rates . THEY WILL” THIS WEDNESDAY will raise RATES ..hear it comes!!! Wall Street gives it a less then a 3 percent chance that the fed will raise the rate.. Get Ready Get Ready !! The Federal Reserve WILL raise the rate THIS Month “Triple EVE of what people call Halloween” Wednesday the 28th of October and the rate increase is suddenly UPON YOU. I have been telling everyone since January 2015 it will be October 2015 . Once this happens two more major events will take place before the end of the year 2015. Invest NOW on the rate increase. May God bless you all who have ears to hear ..
What are you invested in?
Barry, dream on; are you the new chairman of the DNC? Please enlist every member of the DNC to follow your advice over the next year, in time for them to wake up before the election.
I currently live in the Pheonix area. I have noticed a huge increase in apartment consruction all over the area. I mean, there are hundeds of large units going up all over the place. I feel this may be an indication of a top in this market.
Could be, but the reason is that Millenials are not buying houses, but renting instead. They often have huge college debts, they are a mobile society that doesn’t want to be saddled with property when they change location, they may believe mortgage rates will remain low, so there is no hurry to buy, and they often are holding off on marriage and children ’til their 30s. Thus, the natural market for buying houses is holding off.
Last week’s rally was a few very large cap stocks responding to surprisingly good earnings, ala McDonalds and Amazon. But corporate profits are falling and will continue to fall for the next several quarters as global contraction works its way through. So broad market will trend down as profit outlook is factored in. This is also why long bonds did not change. Big events down the road are further slowing in China, emerging market debt defaults, energy company loan defaults at US banks, China dropping out of US debt buying sending rates higher despite Fed policies, and expanding global recession.
I don’t think this kind of analyses works because the markets are so controlled.
I suspect that the EU is going to go south soon and that will drag down the Yen because Japan buys much from the Europeans. We may see some increases in the market due to influx of some of the foreign investments. But the US Debt and lousy economy will finally kill the dollar and it to will collapse.
The time frame is beyond me…but I don’t see it taking a year or two, nor do I see it as happening in 6 months..although it might start by then. How long it takes to drag down all three is to much for me to absorb.
Hey guys,
With regards to Mr. Zells move to sell 23,000 apts.- I remember vividly back in 2007, when he sold his Commercial Properties Trust to Blackstone and saying to myself what does he know, that we don’t? What a prescient call-not betting against him here either. I will be selling a few of my rentals as well.
Also, Mr. Ron Pratt sold his $500 million dollar collection of classic cars in January, buildings and all ! We should all be paying close attention to the moves these billionaire investors are currently making.
Mike M.
He da guy that sold out at the top last time, no?
When Zell sells, you sell.
Bond investors are known as being smarter than stock investors.
we’ll see how smart they are when rates go up. bonds are heading for a massacre.
It’s increasingly frustrating to keep “super amounts of cash” as you advise while the market surges. Talk about lost opportunity costs!
bruce
I agree it is frustrating, especially if you talk in volumes that can impact individual stocks. With cash you have short term certainty. None of us can pick tops and bottoms. It comes down to discipline and timing. While patience and impatience argue the tops and bottoms we need to set reasonable targets and be patient.
Mike:
Patience is a virtue and we all know what goes up, comes back down to earth. You are smart to wait it out for stocks to come down and then buy the stocks when they are low. The only folks buying stocks now are the traders and the smart folks are moving money to equities and cash. The FED has no where to go with rates but up or stay put. So it is a game of patience until one side or the other blinks. The economy is going no where unless consumer products start moving and people start spending. The FED better get those rates up to a 2% inflation level and soon, or I foresee a stock market crash in 2016 like none in history. If China’s market sneezes, the US market feels more than a breeze.
Zell’s actions prove that no matter what the federal reserve does the business cycle is invincible.
Bond yeilds can only remain flat or decline simply because of global QE’s , rising dollar and more particularly resulting from investor mistrust. QE’s are similar to a national bankruptcy declaration and self approval (confirmation) / funding of a plan of reorganization that is NOT feasible.
Would you really buy bonds issued by Greece, Argintina,Brazil or PR?
Oh yeah and or a “municipal bond” from Detroit or San Bernardino?
Nope and since every body is bankrupt, bonds will be idle for at least a decade. They really can’t go negative yeild!
Stocks have already imploded, the only buyers are the issures themselves, with the premise that confidence can be restored in the markets. Forget about earning, price ratios debt and junk or demand.
Then we have the interventionist, governments, establishments, institutions and those that simply have the means and motive.
However, its way to late to rescue the money – just think of all the “buy backs” that will surely regret those motives – if they did not unload in time!
If Sam Zell is selling apartments it means renters are decreasing or not able to pay . That means recession.
In my humble opinion the price of oil will stay low until Russia goes bankrupt, as President Obama realised that sanctions didn’t work. He was forced to copy President Reagan who did the same thing in the early eighties, lowering the oil price to ten bucks a barrel.
This low oil price might just pump up the price of gold. And it will likely keep interest rates low to. Of course that’s just my opinion, and I could be wrong.
In general, I think you are right about oil. We have had the domestic rig count drop from 1600 to 600 with no appreciable decline in production. Storage is still at record highs. World demand us also weakening slightly. I not sure Obama has had as much to do with it as the Saudis who also don’t care for the Russians because they are a competitor. The only wild card here is that most of the numbers we see are little more than educated guesses and could be manipulated or just plain wrong. PS. Reagan did indeed have a strategy to send oil lower to topple the Soviets and it worked. Jim
Jim,
Star Wars bankrupted the Russians…. Then Cheney/bush sent our oil companies to Russia to rebuild their facilities and now the Russians are pumping a ton and using those profits to rebuild their military…. Just another screw up thanks to the Cheney/bush the Republicans… :(
The oil price will stay low until we moderate and control the demand/supply equation. This has more to do with OPEC wanting to protect market share of the world oil supply.
The Saudis wanted to keep the price of oil low to destroy the American frackers, and they have nearly succeeded. Over 200,000 jobs have been lost in the oil industry in this country, and who knows how many others in makers and services that depend on that industry.This is playing hell with the employment figures that are so important to the decisions of the Fed, as well as the economic health of our nation. It is nearly tantamount to a declaration of war, and we should regard Saudi Arabia as a potential – if not actual – enemy.
Welcome to (INDEBTED) Renter Nation. As a country we have wrong 7 reasons why:
1. The young (who are going to pay most of the Bills) have crushing student debt, whether
they were educated, or maybe not. Create an incentive to educate the brightest young!
2. Geezers think they’re entitled to FREE dam near anything – especially healthcare!!
3. The military-Industrial complex sees an ISIS person around every corner, and they
want more of our tax dollars. Shrink military budget by 70%!
4. We make lithe anymore, except criminals, and BAD trade policy.
5. We haven’t passed a budget in years, let alone try to love on one.
6. The item (OIL) that is likely damaging the climate the most is grossly under-taxed.
7. Our infrastructure needs a heavy rebuild, our legislators generally, can’t DO math!
We spend $$ on items that fail to directly benefit the TAX Payers!
51% of all American families now earn less that $31,000 and 94 million are out of work. We have a huge ongoing recession that has been covered up by our government which also lies about the unemployment rate and floods the economy with freshly printed greenbacks to further the coverup.
None of the above problems existed before we gave power to the Republican Revolution in 1981
We are in an interglacial pause. I can assure you our long term concern should be freezing to death. It’s not if the ice returns, it’s when. Global warming could also be the best thing that ever happened to us. Point is, we know very little about the climate as fact. We have computer models that have proven to be wrong over and over. Jim
Yes, Jim, Earth was a once a terrifically hot place, as comets and meteorites smashed into it during the billenia of it’s formation, and it has been cooling from the surface inward ever since. Vulcanism is apparently way, way down from it’s prehistorical level, and the Sun, itself, may be slowly cooling, and providing less heat to the surface. We seem to be in a warming period now, since the last Ice Age, which could have resulted from some event, possibly volcanic, that caused worldwide cloud cover for some millennia, preventing much of the Sun’s radiation from striking Earth’s surface. So we have fluctuations, currently a warming one, but something will surely happen to restore the cooling trend, eventually. That is something for future generations to worry about, as we worry about warming.
The sun will burn out in a billion or two years. And it will be cold then. Is that what you mean by thinking long term? Meanwhile 2015 is turning out to be the hottest year since they started keeping records. Choose your worry.
Mike
Our country needs to realise that the supply, control and availability of oil has consequences. It can start wars for us (ww2). OPEC doesn’t have anything else. Look back at the 1980’s to see how much oil flat lined in price. We took on shale oil for security and independence, not price. Security, independence and freedom does not equate to cheap oil, it equates to the economic viability of oil for producers who will suffer if we don’t support the price of extraction with a small profit. The Saudis would love to see our oil producers go broke. Then when OPEC puts up the price of oil where does that leave us.
If we were to line all of our interstate highways with nat gas pipelines…….we would be energy independent overnight. Dems dont like petroleum products though.
Right Howard. I think people fail to appreciate that the Saudis lowered the price now so they can raise it later. The shale producers need about $60 a barrel to break even. We could be profitable still at a lower price if it wasn’t for all the dad gum debt. Jim
Jim, all that “dad gum” debt resulted from unrealistically low interest rates that encouraged drillers to overdrill and bring down the price of oil. Just another result of politicians messing things up for most of us by favoring the sources of their campaign money.
I agree that the lack of breath in this market is not an encouraging sign. By the way I read today that 63% of the stocks in the US are below their 200 DMA. On the other end we should see a real collapse in high yield and that doesn’t really happen. Difficult times, let’s work out on the split.
Months ago I read an article about the record number of permits being issued back then for construction of multiple housing units, with comments made showing reasons there would not be adequate numbers of renters to justify all the additional construction. Couple that with someone like Sam Zell who should know what they are doing, and I am not one bit surprised if this type of investment will bite the investors back. I expect that many investors will be from the developing world who think the free market will not do to them what central planning has done to them back home. What they fail to realize is that America is no longer the free market it used to be since Washington has now distorted the system. I live in Asia and the locals have no comprehension of the destruction to free enterprise carried out by Washington over recent years.
AMERICANS, for the most part have no comprehension of what politicians in Washington and elsewhere have done to us – with our own encouragement, because most of us know nothing useful about economics.
Where are the jobs required for young people to pay the rent? Don’t be surprised if the Democrats come up with an Obamarentalcare program as part of their freebie platform.
Pacific Gas and Electric usually known as PG&E out here in California, our local utility has been in the gas business almost before they were in the electric business. They started with coal gas, a form of home use gas rendered from coal. They even sold steam from their generation plants to heat buildings in San Francisco. And to further do things backwards they got into the Interurban electric railway business as a way to use excess electricity. John Martin and Eugene DeSabla two of PG&E’s founders put together the first high speed, high voltage rapid transit before New York or Chicago, they called it North Shore Railway. They built a high tension transmission line (60,000 volts alternating) an unheard of one hundred fifty miles. For the record almost all rapid transit systems use the NSR system of 1903. It was the prototype for Penn Stations and Grand Central’s electrification. It used direct current for propulsion and alternating current for track signals. A motor-generator provides track current, a high voltage alternating current motor drives a direct current generator.
Interesting. Back in my newspaper boy days in the ’40s, I used to deliver a paper to one of those converter stations. It was built to look like a neighborhood house, and manned by two engineers, who often provided me with a glass of water about halfway through my route on hot days. One time, the converter blew up, fortunately not injuring anyone, but blowing a hole in the wall and roof, and shutting down parts of two of Baltimore’s major streetcar lines. for awhile.
Michael,
The Bond markets, Russell 2000, Oil, Nat Gas, etc etc are ALL pointing to a massive storm of Deflation that is continuing to grow as the worlds middle class gets hammered and overall private and sovereign DEBT and associated leveraged DERIVATIVES are too large for the economy to handle. Trillions and Trillions and Trillions of dollars of cheap, worthless, fiat currency printing by central banks as FAILED to address the economic/financial issues. In fact it is the root CAUSE of all the problems via mis allocations of capital and mal investments etc..etc.. Bottom line: the equity markets and much of the bond market are in the beginning stages of a SEVERE bear market.
You do know tht we had NONE of these problems before the Republican Revolution in 1981, don’t you? There is a solution…. Quit electing Republicans. It really is that simple!.:(
everything is wrong. isn’t that the time to buy?
bonds are expensive, as expensive as they can get. we know that be cause rates are rock bottom. if bonds had a p/e like stocks, it would be a very high ratio. i like to buy things when they are a bargain. bonds are no bargain.
It seems there is some misunderstanding about some bonds. To understand bonds one must look at the real rates compared to nominal rates and how inflation or deflation affects bonds. While it is true nominal rates are historically low for example about 2.31% on a 10 year treasury note but because there is currently negative inflation the real rate is closer to 3% which is historically high say compared to the 1980’s. This means that for now it is likely that longer dated bond prices are likely to rise as their interest rate falls.
nomial rates on the 10 yr are about 2%. no inflation, so real rates are also about 2%. bonds are now the risky asset. do you really want low returns on a risky asset?
Good analysis Mike,
Bonds aren’t playing along because growth is so weak, according to bond investors, that a little rally in stocks means nothing and so far since 2000 their long term view has been solid.
there’s a big difference between owning bonds and owning bond funds. if rates go up, bond funds will lose value, a sad fact of life. not everyone holding bond funds understands that. imagine their dismay when these naive investors learn the hard way that bond funds can be a risky asset. bonds are heading for a massacre someday.
Maybe the surge in mega-cap stocks is a result of capital fleeing from the financial mess in Europe. Just a guess.